For many years, financial institutions and sellers of consumer products have offered “revolving” lines of credit, typically extended through the issuance and use of embossed plates or plastic articles commonly referred to as “credit cards.” Credit cards typically identify the name of the issuer (e.g., Visa, Sears, Amoco), the name of the card holder, a numerical account number, an expiration date, and certain other information. The terms of a credit card's use are typically set forth in a written contract entered into between the issuer and the holder of the card.
When goods or services are purchased using a credit card, the issuer of the card typically advances funds to the selling merchant on behalf of the credit card holder, less a fee charged to the merchant. The issuer then typically bills the credit card holder, at periodic intervals, for amounts that the cardholder agreed to pay for goods and services purchased using the issuer's card during a particular “billing cycle.” The credit card holder is typically granted a period of time, commonly referred to as a “grace period,” during which the holder can pay his or her bill in full and avoid paying any interest on funds advanced by the card issuer to merchants. Some cardholder agreements require that all credit card debt incurred during a particular billing cycle must be repaid to the issuer in full prior to the end of the “grace period.” More typically, cardholder agreements permit cardholders to repay their credit card debt over time, with interest on unpaid balances due following expiration of the “grace period.”
For most of the twentieth century, the rates of interest chargeable by credit Sponsors in the United States were regulated and limited by usury laws in force in many states. State usury laws typically prohibited credit Sponsors from charging more than a certain annual percentage rate (“APR”) of interest on unpaid balances. Thus, prior to the late-1970's, interest on credit card debt was typically charged for and calculated similarly to interest charged on other forms of debt: card holders paid the Sponsors a specified annual percentage rate of interest on the amount of any unpaid indebtedness due following the end of a credit card's “grace period.” If for any reason (including inadvertence or oversight), a cardholder did not pay his or her bill during a particular billing cycle, the unpaid balance was carried over, with accrued interest (typically referred to as a “finance charge”), to the next billing cycle, at rates of interest permitted by applicable law. Besides moderating unequal bargaining power between credit Sponsors and consumers, state usury laws provided an incentive for credit Sponsors to be prudent in credit card lending practices and to issue credit cards only to persons unlikely to default. State usury laws effectively precluded credit Sponsors from subsidizing bad debts owed by uncreditworthy cardholders with punitively high interest rates imposed on responsible cardholders.
Commencing in the late 1970's, however, state usury laws regulating credit card debt interest were challenged by credit Sponsors in litigation. In Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978), the Supreme Court of the United States held that a civil war-cra statute, the National Bank Act of 1864 (the “NBA”), entitled national banks to charge interest on credit card debt at whatever rate was allowed by the laws of the state where the bank was “located,” even if that rate were considered usurious and unlawful in the state where a cardholder resided. The Marquette decision meant that if a state had no usury laws, or permitted extremely high rates of interest to be charged on credit card debt, a national bank “located” in such a state could charge its “home” state's rates of interest on credit card debt extended anywhere in the nation, and regardless of usury laws in force in the state of a cardholder's residence.
As a natural and predictable reaction to the Marquette decision, numerous credit Sponsors (a) segregated their credit card operations from their other business operations; (b) transferred the segregated credit card operations to federally-chartered, separately-incorporated subsidiaries or licensees “located” in states whose laws permitted extremely high, or indeed any, rate of interest to be charged on credit card debt, and (c) raised the rates of interest charged on credit card debt far above levels traditionally regarded as just or reasonable by most states. Deceptive practices were often used to convert existing cardholders to the new, higher-priced credit cards. Department stores and issuers of gasoline credit cards, for example, licensed their brand names to national banks located in “creditors' haven” states, which banks then issued solicitations for what purported to be “upgraded” department store or gasoline credit cards bearing the licensed name (e.g., AMOCO, SEARS), but which in fact were bank cards whose terms typically were drastically less favorable to cardholders than were the cards purportedly being “upgraded.” By 2002, some issuers of credit cards were charging annual rates of interest on credit card debt in excess of 30% per annum.
The Marquette decision rested on statutory language permitting nationally chartered banks to charge loan customers “interest at the rate allowed by the laws of the State . . . where the bank is located.” 12 U.S.C. §85 (emphasis added). The charges at issue in Marquette comprised “interest” as that term was traditionally used and understood, namely, an annual percentage rate (e.g., 12%) applied to unpaid balances over a period of time. In the years following Marquette, however, credit Sponsors petitioned the legislatures of “creditors' haven” states to adopt a creative and non-traditional definition of “interest,” with a view to attempting to extend the Marquette decision to various fixed charges and penalties having no relation to any time value of money conventionally defined as “interest.”
For example, if a credit card holder purchased $100 worth of goods using a credit card having an APR of 21%, non-payment of the bill would traditionally have resulted in a finance charge (i.e., interest) of $1.75 ( 1/12 of 21% of $100) representing the time value of the unpaid balance during a billing cycle. Subsequent to Marquette, however, a number of states passed laws purporting to permit such a delinquent credit cardholder to be charged, not merely interest on the cardholder's unpaid balance due, but an additional, arbitrary sum, such as $29.00, on top of and in addition to interest charged the cardholder's unpaid indebtedness, in the event that a cardholder did not make a “minimum payment” prior to expiration of the cardholder's “grace period.” This type of charge, in the nature of liquidated damages for breach of cardholder's agreement to make a “minimum payment” to a card issuer during a “grace period” extended to a cardholder, came to be referred to as a “late fee.”
So-called “late fees” charged by credit Sponsors typically bear no rational relation to any loss sustained or risk borne by a credit card issuer as a consequence of the cardholder's inaction triggering the charge. “Late fees” typically are pre-set at fixed, arbitrary amounts and typically are charged (1) regardless of the amount of any unpaid balance due, (2) regardless of any credit still available to the cardholder, (3) regardless of the identity or payment history of the cardholder, and (4) regardless of whether the card issuer sustains any loss or incurs any increased risk as a result of the credit cardholder's “breach.” In most instances, in fact, a card issuer charging a so-called “late fee” stands ready to extend the cardholder substantial additional credit, and is already charging the cardholder interest, at the agreed upon APR, for any unpaid balance triggering imposition of a “late fee.”
Contracts calling for the payment of liquidated damages or penalties, bearing no rational relation to any loss or damage sustained by a contractor in the event of a breach, have long been held unenforceable under the laws of most states; however, with the Marquette decision in mind, certain “creditors' haven” states has passed laws (a) purporting to characterize so-called “late fees” as “interest,” and (b) purporting to preclude courts from finding that “late fees” are “penalties” or unenforceable, no matter what their amount. For example, Del. Code §945 provides in pertinent part (emphasis added):                [A] bank may . . . charge and collect, as interest, . . . [a] minimum charge for each . . . scheduled billing period . . . during any portion of which there is an outstanding unpaid indebtedness due . . . .        No charges assessed by a bank in accordance with this section shall be deemed void as a penalty or otherwise unenforceable under any statute or the common law.        
The legality of credit Sponsors attempts to charge “late fees” on credit card debt, in violation of state usury and consumer protection laws, was a subject of much litigation in the 1990's. In Sherman v. Citibank (South Dakota), N.A., 668 A.2d 1036 (1995), the Supreme Court of New Jersey held that so-called “late fees” were not “interest” within the intendment and purposes of 12 U.S.C. §85, with the result that credit Sponsors could not invoke the Marquette decision as a basis for charging unfair, unconscionable, or usurious “late fees” in New Jersey. The following year, however, in Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735 (1996), the Supreme Court of the United States overrulled the Sherman decision and held that “late fees” did constitute “interest” for purposes of 12 U.S.C. §85, and so could be charged by national bank credit Sponsors anywhere in the nation, if permitted by the laws of the state where the credit card issuer was “located.”
The Marquette and Smiley decisions together invalidated virtually all state usury and commercial laws which had traditionally protected consumers against credit card charges deemed unconscionable, unfair, or usurious according to the standard of a consumer's home state. Without persuading the Congress or any state legislature to repeal a single law regulating credit card debt or lending practices, issuers of credit cards succeeded, by 1996, in persuading the federal courts to invalidate state laws which, for decades, had regulated and limited the charges which credit Sponsors could impose on consumers. Credit Sponsors were quick to take advantage of the power handed them by the Smiley decision.
According to published reports, between 1996 and 2002, “late fee” revenues of credit Sponsors increased from $1.7 billion to $7.3 billion annually. Between 1996 and 2002, the penalties imposed by credit Sponsors as “late fees” more than doubled, from an average of $13.28 to an average of $29.84, and ran as high as $35.00. By 2002, “late fees” were the third largest source of revenues to credit Sponsors, after interest and merchants' fees. And virtually all of these revenues resulted from accident or mistake on the part of credit cardholders, who had available financial resources which could have been applied to prevent “late fees” from being charged to them, but who lacked any practical means of deploying those resources in an automated, cost-effective, and practical manner sufficient to avoid being charged “late fees”. “Late fees” represent a persistent, multi-billion dollar a year consumer problem which, for years, has eluded effective solution. There is a long-felt but unsolved need for an automated, cost-effective, reliable, and easy-to-use system for avoiding “late fees” charged by credit Sponsors.
It is, therefore, an object of this invention to provide a method and apparatus which credit card holders can use to avoid being charged “late fees,” or their equivalent, by issuers of credit cards or other lenders. As used in this invention, the term “late fee” has its common and ordinary meaning in the field of credit cards and refers to a charge, typically a lump sum, imposed by a credit card issuer when a credit cardholder does not make a minimum payment on or before expiration of any grace period allowed for payment of a credit card bill. The Smiley decision, described above, involved a typical “late fee” of the type encompassed by the invention described herein. The term “late fee” also includes the fee charged by other lenders when a payment is not made within the time allowed for the payment.